A note on casual empiricism

Macroeconomics has see a thrust towards technique, with formal methods being the norm and a strong focus on precision. When Captain James Cook pioneered meteorological observation that mapped wind and ocean currents, it allowed boats to precisely ascertain the optimal sailing time. However there was a reason why rules of thumb prevailed for so long. They are appropriate under the following conditions:

Original situations

Conditions of uncertainty

Lack of data

Boats need GPS and macroeconomics needs DSGE models. But there's still a place for rules of thumb.

Money supply (MA)

We suspect that there is a useful middle ground between narrow and broad measures of the money supply, and attempt to define and identify an Austrian version called 'MA'. It can be viewed as a hybrid of M1 and MZM for the current UK economy. Our special report (released in June 2011) explains in more detail the composition, but note than in January 2012 we made some important updates (see here for an overview). Also, in January 2014 the Bank of England made a reclassification that accounts for the sudden decline (see here for details).

Gross output

By only focusing on final goods and services GDP has two major limitations: (i) it underestimates the amount of economic activity in the economy (by ignoring parts of the structure of production); (ii) it overestimates the role of consumption as a driver of recovery. Using Input-Output tables to find intermediate consumption, we can reveal the annual growth rate of "Gross Output" (defined as NGDP + intermediate consumption).

Productivity norm inflation

This chart shows the relationship between CPI and CPI that is adjusted to take into a productivity norm (PN). It is based on George Selgin's work, and shows the inflation rate if underlying productivity changes were permitted to manifest themselves. The compilation method is explained in these posts:

NGDP

For our guide to using the National Accounts see here. For a discussion on the use of this measure for prediction markets see here.

In my policy paper I advocated a 2% NGDP target. The chart below shows actual NGDP relative to this benchmark, as well as a 4% growth rate.

Here is the NGDP growth rate:

Private Investment

The data used comes from "Gross Fixed Capital Formation" of the National Accounts (Table F). We define "private investment" as the sum of business investment and private sector investment. One way to calculate is to follow this link and use Table G1. It is important to copy the data into a new Excel spreadsheet and then paste the values and skipping the spaces. I then copy and paste into Google Drive.

Natural interest rate

Calendar:

Shadow prices is compose of CPI data, which is released in the middle of each month, but also productivity data which is only released quarterly (latest release: 24th December 2014)

NGDP data is available with the Second Estimate and Final Estimate of the National Accounts (i.e. on or around the 24th-26th of each May & June, August & September, November & December, and February & March)

Private Investment is available with each release of the National Accounts (the First Estimate is released on or around the 24th-26th of each April, July, October, and January but is updated in the Second and Final Estimates)